ECJ rulings: Dutch group taxation regime is partially incompatible with EU law

On 12 June 2014 the ECJ ruled that the Dutch group taxation regime is incompatible with the EU freedom of establishment. This incompatibility is due to the fact that Dutch fiscal unity regime currently precludes the formation of a tax group in cases where the direct parent company is established in another jurisdiction or where there are non-Dutch entities interposed between Dutch entities. Taxand Netherlands discusses the potential impact of this ruling.

Under the current Dutch fiscal unity regime a Dutch parent company can form a fiscal unity with subsidiaries in which it holds at least 95% of the shares in the nominal paid-up share capital. Another requirement is that both the parent company and the subsidiaries are established in the Netherlands. Upon request the parent company and its subsidiaries can elect to be treated as a single taxable person whereby the tax will be levied from the parent company meaning profits and losses of the companies forming the fiscal unity can be consolidated at the level of the parent company and transactions between these companies are disregarded.

The present cases continue on the discussion that started in the Papillon case and the subsequent X Holding case. In Papillon the ECJ ruled that a French parent company and its French sub-subsidiary should be able to form a tax group in spite of the intermediate subsidiary being situated in another Member State. In X Holding the ECJ ruled that the Dutch fiscal unity regime does not allow companies established in other Member States to be included in the fiscal unity. Following both these cases, the question around how to apply the fiscal unity regime in cases where only the Dutch resident companies are included but where there are one or more non-Dutch intermediate entities or where the parent company is a non-Dutch entity. Another outstanding question was how to deal with a fiscal unity between two Dutch sister companies held by a non-Dutch shareholder.

For both the parent / sub-subsidiary case and the fiscal unity between domestic sister companies the ECJ ruled that the Dutch regime is incompatible with the freedom of establishment. This restriction could not be justified. Consequently a fiscal unity between a parent company and its sub-subsidiary should be allowed based on EU law, even when the sub-subsidiary is held by a non-resident company. Furthermore 2 Dutch sister companies should be permitted to form a fiscal unity if they are held by a non-Dutch resident parent company.

On 27 February 2014 an opinion of the Dutch Advocate-General (A-G) was issued raising the question of whether the Dutch tax framework should also allow a fiscal unity between a Dutch parent company and its domestic sub-subsidiary or between sister companies when the intermediary subsidiary or parent company is also a Dutch company. The A-G seems to take the position that if the ECJ rules that the Dutch fiscal unity regime is incompatible with the freedom of establishment the Dutch framework could be considered discriminatory in mere domestic situations in the event that the direct ownership requirement is only waived for non-resident companies. This may mean that in domestic situations a fiscal unity could be formed without the inclusion of intermediate entities. This means that groups of companies while have much more flexibility as regards the composition of the fiscal unity and would be allowed to exclude certain companies, should that be more beneficial from a tax or legal perspective.

In principle the rulings are only binding in EU situations however, based on the anti-discrimination rules set forth in the OECD Model Convention, tax groups should also be allowed when the intermediate holding is a non-EU company since the anti-discrimination rules prohibit a less favourable tax treatment for non-resident companies.

Taxand's Take

The Dutch Ministry of Finance is yet to issue a statement on the ruling but in the meantime multinationals should review their group structure and contemplate whether there are Dutch parent companies with sub-subsidiaries held via intermediate EU subsidiaries for whom it could be beneficial to form a fiscal unity. Dutch groups should also consider filing a fiscal unity request without intermediary subsidiaries to secure their rights should that be more beneficial. Furthermore multinationals with non-EU intermediate holding companies owning the shares in Dutch subsidiaries could consider filing a fiscal unity request to secure their rights.